Have you had credit challenges in the past? Are you trying to obtain FHA financing. FHA uses common sense underwriting. They realize that bad things happen to good people. As one of my previous managers put it: Look at your loan like a court case. Your loan officer is your attorney. The underwriter is the judge. Your loan file is your evidence. Your loan file needs to be well documented to make the underwriter (judge) understand what happened to you in the past.
With that said, you would not go to court unprepared, correct? So, it is well worth your time to prepare for your mortgage process as much as you can, before you contact your chosen lender. This will make the process much smoother and a lot less stressful.
Here are some helpful tips to prepare you for applying for your FHA mortgage.
- Know your credit profile. How has your credit looked in the last 12-24 months? Have you had any late/slow pays? FHA typically does not like to see any late/slow pays in the last 12-24 months. If you have some, write a letter to explain in detail what the circumstances were that led to your credit challenges. (i.e cut in pay, loss of job, loss of income, serious illness, natural disaster, etc.) When writing this letter be very detailed. The underwriter will not be speaking with you personally. So, the goal is to make them understand on paper, what the circumstances were.
- Your letter of explanation will need to address the following items: acknowledge the derogatory credit is yours. Explain what happened to bring the account/accounts into derogatory status. Show remorse. Explain how you intend to keep this from happening again. You will also need to explain all inquiries on your credit report in the past 90 days.
- Provide a budget letter. Any lender can give you the standard FHA budget letter form for completion. If you have problems getting one, email me and I will send one to you. The purpose of the budget letter is to show the underwriter that you have thought out the cost of your proposed home on a monthly basis. The budget letter will have you insert information such as: pay after taxes, groceries, gas, entertainment expenses, utilities, job expenses, etc.
- Provide alternative tradelines of credit. As stated in my previous blog, alternative credit would be any company that you have paid on a monthly basis for the last 12 months consecutively. You can use: car insurance, health insurance (not payroll deducted), day care from a company, lay a way, utility companies, furniture rental companies, etc.
- Rental History: If you are a renter you will want to provide a 12 month clean rental history showing no lates. Be advised, a lot of management companies will not do a verification of rent without the tenant first turning in their notice. If this is the case, explain this to your lender. They should be able to approve you subject to this verification. This will allow you to get your approval BEFORE giving your notice. DO NOT GIVE YOUR NOTICE UNTIL YOUR LOAN IS APPROVED!! Also, be prepared that some management companies will charge your lender for the rental verification and this charge will be passed on to you.
- Student Loans: Do you have student loans in deferrment? If so, please note that they will need to be deferred for 12 months after your closing date. So, if your loan deferrment ends soon you may want to go ahead and call the student loan company and see if they will extend your deferrment. (Only necessary if you have a ratio issue in qualifying)
- If you have student loans in default, judgements, tax liens, or any federal debt in collection: you will need to pay these off.
- Chapter 13 Bankruptcy: you will need to show a 12 month satisfactory payment history. You will need to speak with the trustee and advise them you are applying for a mortgage. The trustee will need to write a letter giving permission for you to enter into a mortgage agreement. The lender will also want to see a 12 month printout showing your payment history with no late pays. The underwriter will also be looking to make sure you had no new lates since the bankruptcy was filed.
- Chapter 7 bankruptcy: you will need to show that your bankruptcy has been discharged for at least 2 years before your closing date on your proposed property. You will also need to show that you have re-established yourself. Note: underwriters do not like to see late/slow pays after a bankruptcy unless there are extenuating circumstances.
- Consumer Credit Counseling Services: The same as a chapter 13 bankruptcy applies.
- If you are not a U.S citizen, you will need to show a valid social security number and proof that you are in the U.S legally and able to work.
- Having 2 month reserves is helpful when you have a credit challenged loan. This means that you need 2 months of your proposed house payment left over after you close on your new home. This could be in your bank accounts or through a liquid retirement plan. Liquid means you are able to access these funds before you are retired. But note, doing so will come with a tax penalty. And did you realize that you can typically pull from your 401K for the purchase of your first home without being penalized. (Check with your 401K administrator for details)
These are a few items that can make getting that FHA loan easier if you have past credit challenges.
When dealing with your loan officer, remember, they are your ally. Tell them EVERYTHING up front that concerns you. They will be able to best decide how to address the circumstances with underwriting and can guide you in the right direction.
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